Payor/Provider Convergence: Joint Venture Health Plans

Background

Health Plans and health care providers are getting into each other’s business.  This payor/provider convergence has taken different forms.  Health systems have ventured into the health insurance business by acquiring or starting their own health plans and by establishing joint ventures with payors, to jointly own and operate a health plan.  Health plans have also moved into the health care provider business by acquiring hospitals, surgery centers, medical groups, and other providers.  This blog post examines one aspect of this Payor/Provider Convergence – payor/provider joint ventures to operate health plans.

A recent study by McKinsey & Company recites that as of 2015 “13% of all US health systems offer health plans in one or more markets – commercial, Medicare Advantage (MA), or managed Medicaid,” with provider-led plans representing a higher percentage (23%) of the Medicaid Market. Consistent with this trend, there have been a number of joint ventures announced between health systems and health plans.  Many of these result in a health plan being owned on a 50/50 basis by a larger health insurer and the health system, though there are other percentage ownership arrangements.  These joint ventures may utilize narrow provider networks featuring the health system’s providers as the core of the provider network.  The health care media has reported a number of such joint ventures between larger health plans and health care systems in various markets across the country.

What is driving this is activity?

There are a number of reasons leading to this joint venture activity.  With the Affordable Care Act and new alternative payment models as a catalyst, health systems are keenly focused on the provision of efficient services and are increasingly assuming accountability for the cost and quality of their services.  These value-based programs require health systems to obtain data to analyze the care provided and to manage that care.  Such programs have also led health systems to develop and use technology and infrastructure to quickly analyze data and incorporate such data into the provision of care.  Such developments have given providers confidence that they can succeed in a managed care environment where they are at risk for some or all of the cost of care.  With such data and focus, health systems believe having a role in managed care operations and the opportunity to share in the health plan’s portion of the health care dollar are appropriate next steps.

The expected issuance of more and different alternative payment programs and increasing population health financial arrangements, encourage health systems to act.  Health systems also view participation in ownership as a way to share in the premium or administrative fee dollars earned by health plans.  This helps them diversify their business into an area they are beginning to understand and for which they are already taking some of the health care risk.

Health systems also seek a role in shaping the network for the health plan.  Through narrow networks which feature the health system’s providers exclusively or in the top tier, health systems hope to drive increased patient volume to the health system.  With a role in governance of a health plan, the health system also sees it as advantageous to target the markets it enters and the larger employers with whom it seeks to contract for services.

A joint venture with an existing health plan or health insurer that has experience and the tools to operate the back office functions of a health plan both reduces the risk and speeds the time to market as compared to a health system starting or acquiring its own health plan.  Many health systems have a history of trying unsuccessfully to own and operate a health plan on their own.  A joint venture provides an opportunity to share the risk and also brings an experienced and successful partner to the arrangement.

Health plans also see positive opportunities in partnering with health systems.  Joint ventures can create marketing advantages for a health plan by aligning with a health system that has earned loyalty from patients in certain markets through the care provided over the years.  Health plans also envision that sharing the operations and bottom line with a health system will incentivize the health system even more to provide efficient care, to eliminate any unnecessary services or waste, and to be accountable for cost of care provided.

Certain health plans also view such joint ventures as an opportunity to help jump start the health plan’s efforts to expand into a new market, with a strong network of the health system’s providers.  Health plans may also anticipate that the health system will furnish it with favorable pricing to allow it to compete effectively for new insurance or self-funded employer business.

What are the more significant issues in structuring such arrangements?

Such joint venture health plans present a myriad of challenging issues, both legal and business.  The issues include the normal issues present in any joint venture between separate businesses as well as ones caused by the positions each has in health care.

• Percentage ownership/governance – Will the parties agree to a 50/50 arrangement or will one party’s need for financial and accounting consolidation or for control require such party to own a majority of the interests and exercise control? If one party needs control for financial consolidation, how may such control be balanced through other aspects of the arrangement protecting the other party without jeopardizing control required for consolidation?
• Investment – What will each party contribute and how will non-cash contributions be valued? Will the level of the contributions trigger the need for a Hart-Scott-Rodino filing under the rules applicable to joint ventures?
• Decision-making – What decisions may be made by the officers, by the governing board, or by the joint venture parties? Are there certain decisions that require both parties to approve?  How should reserve powers be structured?
• Application of Copperweld – From an Antitrust perspective, will the entity be sufficiently controlled by one of the venturers to obtain Cooperweld protection or will it be an independent entity for antitrust purposes? If the later, there will be need for strict Antitrust guidelines to ensure joint venture is separate from and does not engage in improper activities with either venturer.
• Services – Will the joint venture provide its own services or will it acquire some services from the venture parties? What price will be paid for the services and which ones, from an insurance regulatory perspective under state’s insurance holding company act, must “fair and reasonable” to the health plan, generally considered to be at “cost?”  What role will both or one of the venturers have in services such as marketing plans, care management, underwriting/pricing, network development, etc.?
• Leadership – Will the executive officers be representatives of one of the parties or be hired separately by the joint venture to be independent from each venturer?
• Markets Served – In what markets will the joint venture operate? Is the market limited to the service area of the health system venturer?  Is there overlap with a market served by the health plan venturer’s existing health plan offerings?  If so, how are potential conflict issues resolved?
• Provider Network – Who decides who is included in the provider network? Are the products limited to narrow network offerings?  Does the health system venturer have a role in network make-up?  How is provider pricing determined and how is the health system screened from pricing of any competitor providers included in the network?
• Exit Rights – What rights does each party have to exit or terminate the joint venture? What are the triggers for such rights and does each venturer have the right to buy-out the other under certain circumstances?
• Non-Compete/Exclusivity – Is the joint venture’s health plan the exclusive payor offering of each venturer in a certain geography? What, if any, limits are there on the health system in other health insurance participation?
• Side-by-Side Selling – If there is no exclusivity, how does the joint venture compete for business with products offered by the health plan venturer? How are the offerings coordinated if they can be coordinated in compliance with the Antitrust laws?
• Conflicting Goals – Will the potentially different goals of the joint venture, the health plan, and the health system be reconciled?
• Cannibalizing Existing Business – If the health system provides favorable pricing for a narrow network offering, what protections does the health system have that the venture will not market to customers already utilizing the health system’s services albeit at a lower price point through the joint venture? Without such protections, the health system may just be seeing the same business but at a lower price point.

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The increasing popularity of health system/health plan convergence in the form of a joint venture health plan, presents opportunities but also requires a careful identification and resolution of a number of issues for them to succeed and to realize each party’s goals.